Urban Myth: Landlords Save Money by Keeping Spaces Empty (Part One)

STRUGGLING FOR RETAIL: The Village landscape is replete with empty storefronts, like those pictured above on Bleecker Street. Photo by Stephanie Phelan.

Passing by empty storefronts and restaurants, Villagers can often be heard uttering the widely accepted urban “truth”—They (landlords) make money by deducting the high rents which they no longer receive. Leading local commercial real estate broker Brian Kanarek insists that landlords don’t make money on empty storefronts: “Landlords cannot claim a deduction for not accepting rents, no matter how high they were before the lease ended. Landlords can deduct deprecation from empty buildings but not rent they do not receive.” Kanarek has been successful in landing unique spaces for West Village businesses. He believes that landlords want to make deals and fill spaces, that 2017 is a new tenant deal-driven year, and that new West Village neighborhood mainstays will emerge.
Meanwhile, the steady stream of closings continues, turning now to restaurants. In recent weeks, the longtime West Village mainstays Riviera Café and French Roast joined the exodus of Bleecker Street fashion brands—Marc Jacobs, Coach, Brooks Brothers Black Fleece, Ralph Lauren, and Juicy Couture—who drove skyrocketing rents in the first place. The restaurants shutting their doors aren’t just everyday eateries. Star chef Anita Lo’s 17-year-old Annisa closed when the taxes increased by over $80,000, along with Mario Batali’s 24-year-old Po.
Well-known anti-gentrification activist Jeremiah Moss, author of the recently released Vanishing New York: How a Great City Lost Its Soul, believes that hyper-gentrification has changed the very nature of the Village, which can no longer support the kind of authentic local businesses it once had. Moss’ readers may be reminded of Jane Jacobs’ legendary The Life and Death of Great American Cities. According to Jacobs, urban blight results when businesses filled with upscale products irrelevant to locals take over the landscape and then collapse, after having taken down local businesses. Jacobs and Moss would no doubt agree that this is where we are now, with Moss going a bit further.
In recent years, the rents which luxury goods makers paid seduced landlords into immediately or gradually raising rents across the rest of the West Village, ultimately closing businesses that had to survive on normal models of profit and loss. (Moss calls it “murder.”) A real estate rule of thumb for these stores was to keep operating costs—primarily rent—below 5% to 10% of revenues. Rents shot through this ceiling during the last decade, and businesses started dropping like flies. This luxury gentrification phase may have killed the goose that laid the golden West Village egg—a sustainable ecosphere of small local restaurants and local retailers.
Right now, the primary forces that created extremely high rents in the Village—the luxury and fashion brands—are crippled in their larger businesses. Leases now up for renewal were signed in the Bloomberg era; brands assumed that luxury and retail sales would keep climbing. When the likes of Ralph Lauren invaded Bleecker Street, commercial rents rose from $300 to $500 per square foot, as much as or more than Midtown Manhattan. A Bleecker Street resident said Juicy Couture paid over $66,000 per month for a 2,000 square-foot space before they, Ralph Lauren, and others left. These small, Village-based ‘showrooms’ were never intended to make money in their own right; they were brand showcases, hoisting their flags in our ‘haute bohemian’ capital. So now, the same rich retailers who came here to chase wealthy Village tourists can no longer afford the rents they escalated.
These same high rents are impacting even longtime local restaurants where Villagers eat. Although some restaurant owners may not blame the rent, Sweet Revenge, Alexandra, and Home have also closed. And even though The Hudson Diner has emerged a winner in the West Village diner survivor square-off, co-owner Rajiv “Babu” Chowdhury is forced to work seven days a week. He has been facing a decline in business for each of the last three years. Babu says that even though he can pay rising rents and works very well with his landlord, his business suffered when the lunchtime corporate customer base left due to their high rents.
So why don’t landlords just accept radically lower rents? According to Kanarack, new financially qualified tenants can be difficult to find even if they successfully negotiate reduced rents with chastened landlords. In the Village, the tenant must finance his own build out—10% to 20% of the lease—and these upfront costs can stop a new business in its tracks. Zoomies pet supply co-founder Angelique Rufty-Graux, also an experienced West Village restaurateur, believes that new concepts launching now increasingly have large financial funders. Nevertheless, Kanarack sees new deals well under way in what he calls a tenant-driven market.
Moss vigorously disagrees with Kanarack’s optimism. Although the destruction of the bohemian class in the Village has been heralded in each generation since the turn of the 20th century, this time, Moss thinks that authentic bohemians may be gone for good. He helped launch a movement called #SaveNYC and a blog largely focused on the East Village to both mourn local businesses and protect those still alive. Moss focuses on the East Village perhaps because he believes that the West Village is too far gone. #SaveNYC lobbies for small business tax reform and alerts followers on weekends to join and spend more at small businesses under threat.
Are there rays of hope for West Village small businesses? Will #SaveNYC, Mayor de Blasio, and the City Council pass legislation to limit commercial rent increases or cut the commercial rent tax? The power of real estate in local politics makes commercial rent limits unlikely. The silver lining may be that the demise of fashion luxury brand showrooms could lower rents and launch businesses West Villagers actually frequent. (Not long ago, Bleecker Street was filled with local restaurants.)
But if Jeremiah Moss is right, local restaurants and retailers are not just leaving because rents have increased. They cannot survive with the customers who now live in and visit the West Village.
Stay tuned for Part Two of this article.